Investing in China makes little sense currently given the macro and political headwinds the country currently faces, while opportunities abound in other markets in Asia, notably Australia.
That is the view at least of Jason Pidcock, investment manager for Asian equity income and manager of the Jupiter Asian Income Fund.
Pidcock currently has a zero weighting to China having axed his remaining holdings in greater China excluding Taiwan in July last year.
The fund previously held stakes in Tencent, PingAn Insurance and Sands China as well as Hong Kong Exchanges and Clearing in Hong Kong, but had been underweight the benchmark for some time.
China currently makes up 28.81% of the index and its sluggish performance this year as its reopening rally stuttered and the country has been caught out by deflation has weighed heavily on the performance of a number of emerging market fund managers.
This has prompted some market observers to suggest that it makes sense to strip out China from the indices. There are now several ETFs based on the MSCI Emerging Markets-ex China index as well as several active funds from Invesco, BlackRock, Baillie Gifford, Federated Hermes and Fidelity.
Even those fund managers who have launched standalone China funds in the last several years have done so consciously because they know that investors increasingly want to isolate their China exposure and either dial it up or dial it down depending on their view.
There are of course some good arguments for including China in the portfolio, notably that based on a price-to-earnings forward multiple of 11.78x currently, the MSCI China index is cheap based on a relative and historical basis.
However, Pidcock notes that recent developments have cast a further shadow over the investment case for China.
“We don’t believe that for the Chinese government, investors making money from stock market returns is one of their priorities at the moment. We don’t think the current economic cycle is very helpful either. The property market still has big problems, which of course is going to impact the banking sector and put pressure on the currency. Demographics are a headwind along with geopolitics,” he said.
Unconstrained fund
Pidcock has been investing in the region since 1993 and joined Jupiter in 2015. He manages the Jupiter Asian Income Fund, which is a top decile performer in its sector over the past three and five years, according to FE fundinfo data.
The fund is benchmarked against the MSCI All Country Asia Pacific ex-Japan index. It is an unstrained fund so does not hug the benchmark and takes a top-down approach to stock selection so politics and geopolitics factors a lot into Pidcock’s thinking.
It is an income-focused fund, which means that any stocks need to have a dividend yield at least 20% more than the benchmark, although it is currently yielding about 5%, which is well in excess of the 3% for the benchmark.
It is a very concentrated portfolio, which typically has about 30 holdings, although today the figure is 32. Cash rates vary between zero and 3% and the turnover of the portfolio is typically no more than 20%.
As far as weightings are concerned, the most they will introduce for a stock at purchase is 7% of the fund, but if any of their largest weighting stocks outperform, they won’t trim their holdings immediately if they feel they have further to run.
The fund focuses on large-cap stocks with a market cap of more than $3bn, although the vast majority of the portfolio have a market cap in excess of $10bn.
The fund is relatively straightforward insofar as it does not hedge currencies and does not rely on derivatives or gearing to boost returns. Instead, if Pidcock is concerned about the currency of a country, they will either avoid it or invest in the exporters.
In terms of country allocation, the fund is overweight Australia, India, Taiwan and Singapore. Overall, Pidcock unabashedly favours democracies and countries with the rule of law.
In terms of sector allocation, the fund is overweight financials, IT, materials, consumer staples, industrials and real estate.
Down Under
One of the fund’s most notable allocations is to Australia, which Pidcock favours in part because of the country’s strong demographics, noting that much to a lot of investors’ surprise, it has the fastest growing population in the region among major economies apart from the Philippines.
“A lot of investors dismiss Australia as being a commodity-dependent economy, which we think is plain wrong. Australia has got tremendous demographics. The country has a 50% national debt to GDP ratio, which is one of the lowest levels of any developed economy in the world. It’s a net exporter of any commodity you can think of with the exception of crude oil,” he said.
He also notes that a lot of Australian-listed companies have sizeable operations overseas including those in the portfolio. Macquarie Group, for example, is the largest infrastructure investor globally and Woodside Energy is a top 10 oil & gas company globally.
The other notable overweight is Taiwan, which is surprising given Pidcock’s bearish views on China. The fund currently owns three of the largest stocks there: Hon Hai, TSMC and Media Tech.
“There’s a lot to like about Taiwan but clearly there’s one big risk. If China came out tomorrow and said we’re going to abandon our territorial claims on Taiwan, we think the market would go up at least 20% if not more. Clearly that’s not going to happen but what that means is there is a discounting to shares in Taiwan because of this outlying risk,” said Pidcock.
“Even if something were to happen suddenly, we do think the portfolio would outperform in a relative sense because of our zero weighting in China. Of course, everything would go down and there would be few places to hide globally but we would be in a better position than others potentially.”
Pidcock also notes that out of the five markets that the fund has the largest exposure to, for four of them – Australia, Taiwan, Singapore and Korea – the fund dividend yield is currently yielding more than the 10-year government bond yield. The exception to this is India, although Pidcock says that the opportunity there is compelling.
“How do we justify our slightly overweight position in India? It’s because of our confidence in the sustainability of the growth rate. We do expect India to be one of the fastest growing economies and that will translate to growth in the businesses they invest in and stock market returns,” he said.
